Miller was born in Los Angeles, California, the middle daughter of Beatrice (née Ammidown), a costume designer, publicist, and journalist, and Mark Miller, a television actor and producer. Her mother was Aristotle Onassis's god-daughter and an editor of Harper's Bazaar. She has an older sister, Marisa Miller who is also a film actress, and a younger sister, Savannah Miller, who is a social worker.

Miller graduated from high school in Los Angeles, then moved (aged 18) to New York City to study theatre. Her Broadway theatre break came in 1985 when she was cast in the lead (opposite Matthew Broderick) in the Neil Simon play Biloxi Blues (she would also star with Broderick in the 1988 film version of that play).

Miller's film debut came in 1987 in Adventures in Babysitting. She took a role in one episode ("Death and the Lady") of the television series Miami Vice (which aired on October 16, 1987), and accepted several other small roles in film and television work. She then returned to Broadway in a revival of Our Town; her portrayal of Emily garnered her a Tony award nomination. She then appeared as Pee-Wee Herman's (Paul Reubens) fiance, Winnie Johnston, in the 1988 release of "Big Top Pee-Wee."

In 1990, she played Paula in Awakenings, starring Robert De Niro and Robin Williams. She also played in the 1990 movie Downtown with Anthony Edwards and Forest Whitaker. Again in 1990 she appeared alongside Arnold Schwarzenegger in Kindergarten Cop. Miller plays a kindergarten teacher, hiding with her son Dominic from her criminal drug-dealing husband Cullen Crisp (Richard Tyson).

She subsequently appeared in a number of other theatrical movies, notably as Edna Purviance in Chaplin in 1992 and with Al Pacino in Carlito's Way in 1993.

Miller co-starred with Marlon Brando (as his daughter) in 1990's The Freshman and with Gregory Peck (as his lawyer and step daughter) in 1991's Other People's Money. She also appeared as Margo Lane in The Shadow with Alec Baldwin, as well as in the Gary Sinise-directed film Miles from Home.

She had the lead female role in the big budget creature feature The Relic (1997) as Dr. Margo Green. In 2000, she played the scandalous teacher Mary Kay Letourneau in the TV version of a true story, All-American Girl: The Mary Kay Letourneau Story.

In 2002, Penelope Ann Miller made the film Dead in a Heartbeat and starred in a two part episode of A&E's series A Nero Wolfe Mystery. Her 2005 film Funny Money was voted the top film of the Sarasota Film Festival. She appeared in the Fox series Vanished for six episodes, playing the ex-wife of a U.S. senator whose wife has mysteriously disappeared. Her 2007 comedy Blonde Ambition co-starring Jessica Simpson and Luke Wilson performed poorly at the box office. She also guest-starred as Fran on Desperate Housewives.

Miller recently appeared in the horror film The Messengers, co-starring Dylan McDermott and Kristen Stewart. The film was produced in part by director Sam Raimi's production company, Ghost House Pictures. Miller also appears in the TNT series Men of A Certain Age.

In 1994, she married actor Will Arnett. They divorced in 1995. On May 28, 2000, she married James Huggins and had her first child, Eloisa May, on December 10, 2000. On March 23, 2009, she gave birth to her second child, Maria Adela.